No more royal treatment for Indian arms of MNCs as govt doubles tax on royalty, fee for technical services

The Indian arms of the US- and UK-based multinational companies such as Hindustan Unilever, PepsiCo India, and Coca-Cola India will now be subject to a higher rate of tax on royalty payments to their parents.

India Friday doubled its withholding tax rate on royalty and fee for technical services to 20%, from 10% earlier, by moving an amendment to the Finance Bill, 2023. Apart from hitting companies with parents in jurisdictions that do not have a tax avoidance treaty with India, the move also makes it possible for the government to impose the higher treaty rate of 15% on local arms of companies from the US, UK and other countries with whom India does have a tax treaty.

These companies have until now enjoyed the lower rate of 10% even though tax avoidance treaties with these countries provide for a 15% rate as India's domestic law provided for the lower rate.

The US and UK receive more than 60% of royalty payments from India and the move deals a big blow to companies with parents in these countries.

Higher Compliance Burden on Cos
The increase in tax rate to 20% will not impact royalty payouts by Indian arms of Japanese and South Korean companies as double tax avoidance treaties with these countries provide for a lower rate of 10%.

Companies with bases in tax havens such as Cayman Islands, British Virgin Islands, or in jurisdictions that do not have a tax treaty with India will face 20% tax on technical fees and royalty payments. Tax experts say that companies will have to prove their residency under the tax treaties to avail of the treaty rates.

"This will mean that those companies which claim the lower withholding tax rates provided in tax treaties (generally in the range of 10-15%), will now have the onus of demonstrating bona fide tax residency of those countries to avail of the lower rates," said Sudhir Kapadia, partner - tax and regulatory Services, EY India.

Experts say the tax hike could have an impact on the import of technology into India.